Author Topic: What to do with a small windfall?  (Read 1238 times)

nara

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What to do with a small windfall?
« on: October 27, 2018, 06:11:03 PM »
I'd like to hear your opinions on what you would do with a small windfall (from the sale of a business) and why??

1. Pay off remaining balance on mortgage. We have 27 years left on our mortgage at 3.75% interest.

2. Invest all of it in taxable accounts (we're already maxing out all tax advantaged accounts) 

3. Put a downpayment down on a rental property


px4shooter

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Re: What to do with a small windfall?
« Reply #1 on: October 27, 2018, 07:16:37 PM »
What is "small"? 2,3,4,5,6, or 7 figures?

Capital gains? Short or long term? Already devalued assets and have a big recovery?

Reinvest in like business to avoid the tax side?

Will this be treated as income and now your tax advantaged account contributions are in trouble?

If you have 27 years on your mortgage and are considering paying it off, how can you compare that to a down payment on a rental UNLESS that rental property is significantly greater than you primary residence.

Sorry, but the vague details probably explain the 50+ views and no responses.

foobaz

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Re: What to do with a small windfall?
« Reply #2 on: October 27, 2018, 08:32:16 PM »
I'd pick 2 unless you want to take on the extra risk of leveraging to get another property.

Linda_Norway

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Re: What to do with a small windfall?
« Reply #3 on: October 28, 2018, 12:41:24 AM »
Is it money that you can afford to loose? That I would put it in the (taxable) stock market, as stocks are currently on sale.

Otherwise, pay down on your mortgages, which gives a guaranteed profit (minus your tax advantage).

HipGnosis

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Re: What to do with a small windfall?
« Reply #4 on: October 28, 2018, 10:16:21 AM »
Invest.
I had taxable investments long before I was able to max out my 401k - because of the option to withdraw funds if ever needed or had a good reason to.

I would hate to find out my landlord was a landlord because they had money they didn't know what else to do with.

maizeman

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Re: What to do with a small windfall?
« Reply #5 on: October 28, 2018, 10:35:26 AM »
I'd go with #2 (put it into the stock market), but I can understand how others would go with #3 as well depending on what your local market is like and whether or not you have any interest in being a landlord (doesn't appeal to me personally at all, but YMMV).

The key is to avoid option #3. A 30 year fixed rate mortgage at 3.75% (only 1.45% at the moment once you factor in inflation) is something it's quite possible may never be seen again in any of our lifetimes, and its hard to come up with a scenario where you'd come out ahead financially by prepaying a mortgage with those terms.

Dicey

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Re: What to do with a small windfall?
« Reply #6 on: October 29, 2018, 10:59:21 AM »
I'd go with #2 (put it into the stock market), but I can understand how others would go with #3 as well depending on what your local market is like and whether or not you have any interest in being a landlord (doesn't appeal to me personally at all, but YMMV).

The key is to avoid option #3. A 30 year fixed rate mortgage at 3.75% (only 1.45% at the moment once you factor in inflation) is something it's quite possible may never be seen again in any of our lifetimes, and its hard to come up with a scenario where you'd come out ahead financially by prepaying a mortgage with those terms.
What maizeman said, 100%.

Here's some help, if you need it:

https://jlcollinsnh.com/stock-series/

DS

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Re: What to do with a small windfall?
« Reply #7 on: October 29, 2018, 11:33:17 AM »
Agree with maizeman also, but I think they meant to avoid option #1.

maizeman

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Re: What to do with a small windfall?
« Reply #8 on: October 29, 2018, 11:37:20 AM »
Oh yikes you are right. The key is to avoid option #1, not #3. Thanks for pointing that out DS!

CCCA

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Re: What to do with a small windfall?
« Reply #9 on: October 29, 2018, 11:39:39 AM »
I think it also depends on how close you are to your FIRE target.  If you are close now because of the windfall, then you can potentially lower your risk and update your asset allocation by doing #1.  As others have said, it's not mathematically optimal from an expected value sense, but it might make sense from a risk mitigation sense (you may be less likely to run out of money if there's a very severe drop fairly soon (since less of your money is in the market). 

Not advocating for this, just pointing out that it is one scenario where #1 isn't the worst idea. 

erutio

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Re: What to do with a small windfall?
« Reply #10 on: October 29, 2018, 01:17:22 PM »
1.  No
2.  Yes
3.  No

BicycleB

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Re: What to do with a small windfall?
« Reply #11 on: October 29, 2018, 01:33:29 PM »
Taxable accounts.  Unless you truly want a rental property. That's a personal decision IMHO - too many factors for it to be purely a financial choice.

Also, you can go from taxable to rental any time; going the other way includes large transaction costs. So start with taxable.

mathlete

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Re: What to do with a small windfall?
« Reply #12 on: October 29, 2018, 01:45:23 PM »
How old are you?

PDXTabs

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Re: What to do with a small windfall?
« Reply #13 on: October 29, 2018, 02:12:21 PM »
I'd like to hear your opinions on what you would do with a small windfall (from the sale of a business) and why??

Between those options, I'd absolutely chose #2, invest all of it in taxable accounts, because long term that's going to be the best reward and also have the least headache.

With that said, now's a good time to take a long hard look at your emergency fund. Would you sleep better at night if it was bigger? Should some of that windfall end up in I series savings bonds (assuming you are a US PR or citizen)?

Money Badger

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Re: What to do with a small windfall?
« Reply #14 on: October 30, 2018, 09:15:36 PM »
You mentioned selling a business so it depends on whether you're trying to reduce your monthly "mandatory" expenses to be more flexible on a future business OR whether a steady corporate job is next...   And years until retirement.    And whether the mortgage gives you any tax benefit with the increased standard deduction and tax law limits for 2018 onwards...   Perhaps split the difference between "income and growth" to ensure some this windfall is guaranteed to help your situation...

50% to #1 (and recast that mortgage to a lower "required" payment each month to improve your margin to paydown/invest/deal with life's surprises in the future).   Then 50% to #2 for index funds (given today's frothy market, dollar cost average the rest in a chunk each quarter until done putting the spare funds in a higher rate savings account to keep up with inflation meanwhile but lower transaction fees in the process).    The effect (depending on your mortgage interest deduction qualification status this year) could be like "buying a 3.75 (plus your tax rate to this) % income bond" w/peace of mind this is "locked in" for 27 years (versus current situation).  And you build equity / growth positions that may end up giving you relatively good buy-in points in the market the next 12 months.